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Soros versus Sinn: The German Question

The ongoing euro crisis has been a source of increasingly heated debate worldwide. Now, George Soros and Hans-Werner Sinn, two regular Project Syndicate contributors and leading figures in the discussion, debate the cause of Europe’s crisis and how to overcome it.

"Germany's Choice" by George Soros

FRANKFURT – The euro crisis has already transformed the European Union from a voluntary association of equal states into a creditor-debtor relationship from which there is no easy escape. The creditors stand to lose large sums should a member state exit the monetary union, yet debtors are subjected to policies that deepen their depression, aggravate their debt burden, and perpetuate their subordinate position. As a result, the crisis is now threatening to destroy the EU itself. That would be a tragedy of historic proportions, which only German leadership can prevent.

The causes of the crisis cannot be properly understood without recognizing the euro’s fatal flaw: By creating an independent central bank, member countries have become indebted in a currency that they do not control. At first, both the authorities and market participants treated all government bonds as if they were riskless, creating a perverse incentive for banks to load up on the weaker bonds. When the Greek crisis raised the specter of default, financial markets reacted with a vengeance, relegating all heavily indebted eurozone members to the status of a Third World country over-extended in a foreign currency. Subsequently, the heavily indebted member countries were treated as if they were solely responsible for their misfortunes, and the structural defect of the euro remained uncorrected.

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George Soros is Chairman of Soros Fund Management and Chairman of the Open Society Foundations. A pioneer of the hedge-fund industry, he is the author of many books, including
The Alchemy of Finance, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means, and The Tragedy of the European Union.

Argentina in 2001 had it's currency pegged to the dollars. As in the case of greece, this wasn't backed by competitiveness and the market soon realized this: borrowing rate increased to 30%, the peg was attacked and could not be maintained. This triggered a debt/currency crisis. So far the story is the same.

But Argentina devaluated 40%, the shock was hard and brutal, GDP fell by 40% as well. But the recovery was as sharp: almost 10% growth for 10 years.. 5 years after the crisis, real GDP per capita was higher than before the crisis !

Southern Europe, on the other hand, owed money to fragile german and french banks that could not take another blow from a devaluation of these debts.. but would highly benefit from the high interest rate payed by southern countries. Greece, unlike Argentina, was also subject to stronger political pressure from European neighbors: they were forced to stay in the Euro and pay their debt in Euro without benefiting from the low interest rate that should come with it. The German and the French government always making the minimum to make these countries stay in the Eurozone, so the banks could leech these countries longer and heal from their own excesses, pay their CEO and reimburse the northern governments.. It should also be noted that northern export-driven economies manage to keep exchange rate lower thanks to the indebted south, which is another source of profit they make out of the situation. But what's the result for the Greek people?? 5 years down the line, there is no growth, misery spread everywhere, nazi parties are on the rise. What a contrast with Argentina !

After reading here the german position defended by Hans-Werner Sinn, I can't really say if he really means that Germany wanted to help the southern countries (and was really bad at it)? Or if he's just being sarcastic and cynical about it. But based on the comparison with argentina, one thing is clear: the “help” they received to stay in the Euro was totally harmful.

One thing is also clear: southern countries should put an ultimatum:
- either the ECB mandate is changed to target 4-6% inflation for the following 5 years (instead of ZERO or negative) and the eurobonds are created (alternative: northern EU pay the difference in interest rate). This will help them alleviate their debt and adjust wages to competitiveness (instead of a long and painful and depressing deflation, i.e. the current condition imposed on them)
- Or southern countries leave and pay their debt in the new currencies they will print, which would destroy the bank and financial institution in the north.. which will be bailed out anyway by northern governments. Southern countries will suffer a fast adjustment, but at least will be free from the current deadlock.
Facing such a credible alternative (because the South would win with each proposal), I am convinced the bank lobby will pressure Brussels and Frankfurt to increase inflation and pay the interest rate difference. But the problem is that the bank lobby doesn't face that alternative, because they already convinced southern government (through corruption, threat or lobbying, I don't know) to not present this dilemma to northern EU.

This debate has taken place under a restriction that has defeated it before a word was written. The economies of the world are based upon the cost of energy and its logistical applications. That unjust and inequitable foundation is about to be replaced.

I have a theoretical question for both Mr Soros and Prof Sinn.

There have been new energy inventors in the past that appeared to threaten the global economic structure created by the 13 families ruling the planet. Nikola Tesla is a most prominent example and he was destroyed by a jealous Edison and a misled JP Morgan. Electro-magnetic energy, clean, bio-friendly energy is not dead along with Tesla, it is very much alive.

This is the core of my question: Say someone, who could not be stopped, were to release a new low cost, fast ROI, off the grid, energy device which once installed drew an endless supply EM energy from the Sun 24/7. Say it was designed in such a way it was scalable from a domestic residence, through a commercial user size to large industrial applications, and provided all the energy the owner desired. Say that the same device modified accordingly could power all adapted existing and new forms of transport, with unrestricted limitless performance! What would happen to your present economy and what sort of economy would replace it?

You can dismiss the question if you wish but you will be faced with it one day very soon!

My prediction is that by 2030 EM Energy will be the only power source globally. As we stand here now, all this debate over investment in which fossil fuel or alternative energy under pinning which Eurobond or which monetary system is a waste of energy literally, because the technology is already redundant and it is already past its sell by date. Only the greed of the few and fear stops the re-deployment of labour and funding of a new energy source, economy and global community.

All of you are talking about one isolated solution. As I see it, this particular discussion merely addresses, albeit a critical one, structural blockage of capital flows. There is, of course, much more activity that must occur in order to restore foundations so that broadened productivity and wealth accumulation occur.

I think too much burden is being put on Germany to commandeer and this leads to the high probability of conflicts of interest. Better to have an outsider oversee and offer guidance. We all know that the international community needs to reassess responsibilities due to a number of misleading blunders on the part of the United States.

Sinn betrays a very defective knowledge of American debt history (the purported moral hazard created by Alexander Hamilton is nonsense) and thus too glibly rejects debt mutualization (Eurobonds) as part of a solution to the Euro's problems. See my blog http://silverberg-on-meltdown-economics.blogspot.co.at/2013/05/usa-vs-eurozone-how-many-differences.html.

Paul de Grauwe has just restated the case for a European Hamilton Moment in these (web)pages: http://www.project-syndicate.org/commentary/the-debt-pooling-scheme-that-the-eurozone-needs-by-paul-de-grauwe.

I believe the present solar-clock based monetary system has outlived its usefulness to the 21st century global economy. Pricing/valuations of monetary assets based on this solar-time will only distort the economic-management of global-societal-relationships.

The better way forward is to create multidimensional currencies that will capture productivity-gains and restore the purchasing-power to the global citizenry.

Neither Sors nor Sinn approaches advocate any solution to the built-in unfairness of the present-day money-mechanisms that ignore the biological and the non-biological realms that have remained disconnected since their conception.

The future of money and monetary assets are irrelevant for individual and societal-well-being unless they are linked differently from the present-day economic theories.

very interesting !!! and according to what i wrote you about G 20 Worldwide Growth Strategy and global finance rules
If we want to have a long term balanced social developmente we need take the following actions

GROWTH Strategy for G20

2 steps

a) The EU economic policy must move simultaneously to worldwide (G8 and more ) political and financial reforms .

No one economic policy strategy (on tax , on workers, on trade, on growth ) will have any effects on sigle countries without a common and accepted worldwide ( no one country excluded) agreement on beating speculation, corruption and finance abuse.

Financial Derivatives still worth 14 times worldwide stocks exchange markets ...the situation became worse even after the 2008 crisis advice ... what are we waiting to fix rules and make them be observed ??? as every common citiziens have been asking since 5 years ???

To overcame single countries and worldwide crisis we need to move all together sinergically .

"Fiscal compact" agreement in Europe has been a good first step .... now we need

1 ) a Global " Fiscal Compact,

2) a global Balanced Budged in any other world countries constitution

3) to abolish all worldwide Tax Heavens and make agrrement among governements to stop corruption in private and public business.

B) Fixed this worldwide FINANCIAL /ECONOMIC target any single countries should simultaneusly start to reform deeply his domestic not only FINANCIAL but also POLITICAL AND PUBLIC Structure, a structure that has gained in the last years more and more importance in the success of all the economic policy actions. In particular a factor that affects economic development and that is common to both Politics and Pubblic sector is the corruption linked to political patronage, this factor has blocked the efficiency of the social system at any level in some EU countries like Italy, Spain , Portugal, Greece .

From these point of view EU should fix immediately some social standard measures index to be applied by the singles EU country members that are particularly affected from inefficiency in political and public sector system.

Eurobond could be a financial instrument useful to solve financial crisis in those countries that can demonstrate to cooperate both in financial and political and public structure reforms . Most of the time Financial results in single countries come out only if some political and pubblic reforms have been done .

Concerning causes of the financial crisis in the Eurozone, I have to say I'm surprised that neither contributor to this (necessarily) long exchange mentions fraud, corruption, nepotism, hugely overblown public sectors (especially Greece, but also Italy), lack of democratic processes and - last but far from least - systematic tax evasion as factors (tax evasion being a massive problem here in Germany as well) - and those just for starters. Even though he treads ultra-softly on the issue ("walking on eggs"?), Professor Sinn nevertheless makes it clear enough in his contributions that there is a massive amount of political resentment in Germany concerning the bailout of the hugely indebted Euro member states. Those who don't regularly read German newspapers online (and I mean the respectable broadsheets, not the Bild-Zeitung) cannot grasp the depth and breadth of the animosity that is expressed by countless readers who vent their spleen against the "Euro-Rettung" and the almost complete lack of democracy involved in it. The main reasons behind the resentment and anger precisely have to do with the problems I enumerated (fraud, corruption, tax evasion, undemocratic processes, etc.), rather than frustration at uncompetitive economies. In this respect, the debate between Mr. Soros and Professor Sinn takes place in a very, very curious political vacuum. I would advise Mr. Soros to learn German, spend some serious time reading German newspapers and then (and only then) get back to us.

A very unspoken angst concerns internal issues of Germany. Germany is a confederation of 16 states, each of which have their own financial policy. These local arrangements are not added to the public debt. If their arrangements (social security, healthcare and pension) are taken with the wrong set of pills (such as unsupportive due to an aging population) and regarded as toxic, then Germany can add nearly 4 trillion euro debt to add to their existing debt. So, Germany is investing on working their way into the future... which is ok and admirable, and in order to maintain the pyschological momentum it seems that 'austerity' is the thing that does it for Germans.. especially since they've only recently finalized the payments for WWI there is a renewed sense of freedom and self-governance. But that also means that Germany is not as rich as other EU members, so the public view of Germany as "the" engine of Europe is simply not true. But this idea of self-governance is reflected and projected onto other members of the EU. That is not bad, per se. It is in fact nobel. Unfortunatelly other countries are not as responsible and also joined the EU with a different notion of "union". The thread faced by the EU is larger than this though, but there is no history book on the future and the effects on productivity due to ongoing automation, digitalization and now the emergence of modular robotics and artificial intelligence, make mass unemployment an unfortunate reality if any of the EU members continue to grasp to a medieval economical model.. Shame on all.

For Germany to support the other countries and softening the pace of further austerity measures, it would have to let go a defining aspect of its post WWII self-perception: the German Constitution and its revered guardian, the German Supreme Court.

That is more than many are willing to pay, particularly as there is no guarantee that Southern Europe would put its renewed access to cheap credit to good use. In addition, none of these countries seem to be willing to put their own sovereignty at disposal either, but they demand it of Germany.

The one thing that Sinn underestimates in my opinion are the exit costs for Germany. We have no idea how that would affect the banks and what kind of Derivatives domino could be triggered. I also think that a country that is as export oriented as Germany would suffer economically much more than he is willing to admit.

My issue is that I do not see a constructive way forward. The coming months and years are going to be challenging.

Coming down hard on banks in the wrong way is counterproductive. The brains they employ are in trade but their societal role is with retail banking and providing loans to small businesses. Most lack the competence to gauge any such loan.. and in time when that didn't matter and it was just a case of bellybrain logic things worked fine. Making them adhere to all kinds of rules and risk management about things there is no basic understanding of is having bank upon bank retract from this segment of the market.. and in that way they are murdering innovation or any natural eb and flow in the normal economy. Of course, even random trading and following the main stock market indexes will provide plenty of income for most banks and as long as we're in this long globalization shift from an economy of scarcity to economies of information, when trading information itself it is pretty much a win-win situation for the banking sector. Now, governments can try to suddenly act as if they have an ethical hickup and enforce all kinds of halfwitted policies, but indirectly they are responsible for the entire malaise in Europe. Instead of ending up imprisoned in a downward spiral of overregulation it should be common sense that ambiguity is a reality and giving someone the benefit of the doubt is the best policy. Upto now, more than half my years as a wannabe entrepreneur my doings are obstructed by 'guilty until proven innocent' policies which by any measure are borderline insane. If the state isn't sucking my wallet dry, then the banks guarantee that nothing lands in it. For all these good people that yearn to do something of value.. that is by far the majority. So why do most policies focus on the 2-4% wrongdoers? Outgroup homogeneity bias does of course play a role, but only as much as it is used to amplify nationalist tendencies.. and there we also have something.. nations are the wrong scale, the wrong solution to address such problems. Second rate politicians who didn't make it in Brussels have come to dominate what is a dying institution struggling hard to survive, and they can't make it happen, not matter how savvy their marketing advisors are.

Soros is too pessimistic: periphery countries ARE SLOWLY regaining competitiveness. What the periphery SHOULD DO is impose a wage, social security and profits freeze: or even a 5%pa wage and profit cut. That would equal devaluation and would solve the problem in two years.

Of course that would cause a few riots. But the peasants like having a good riot once a month regardless.

Mr. Musgrave, I live in portugal, and I can assure you that wage and profit cuts in this country over the last 2 years are well above 15%, forget the 5%...and the public deficit worsened dramatically despite the trade deficit shows signs of correction. However this trade deficit correction came through rising exports to ex-colonies (not dependent on low wages), especially construction contracts, and , surprise, dramatic import reduction following sharp domestic consumption and investment contractions. But as soon as investment goes up (and there is no other way to get to positive growth), so will imports, and... The point I am making, is that periphery countries problems will not go away by simply lowering wages or if you want to use another word ... devalue. It is the "structure" of production in these coutries that should change, meaning produce less textiles and produce more of something else which is not as exposed to cheap asiatic or other competitors. Competitiveness, is not merely a function of wages, it depends crucially on the sectors a country specializes. To achieve this structural reform a country needs time, and good honest governments. There is also a myth that mediterranean coutries are not hard working. That is not true: in portugal we work 40 hours/week, with 22 days off per year this to get 485eur (min. wage) in our pockets everymonth (although you need to add this 414eur twice every year)... and you can only retire at 66 to enjoy the max pension. So we do not lack hard work, we lack intelligence!

Sinn says that "Germany will not accept Eurobonds" since it would be against the rules (German Constitution and EU Treaty) and since the current political leadership in Germany is against the idea. In addition, the German people would not accept eurobonds if asked in a referendum.

This is the standard line from respondents on the German right, at least although it is entirely hollow and illustrates Germany's continued obsession with "rules" (at least as long as they are to Germany's benefit) as opposed to adapting to an evolving situation in order to improve things and in order to avoid disaster.

Nobody ever assumed that the Maastricht Treaty could not be amended. On the contrary, is has been amended several times since the early 1990s and could be amended again, as required and according to the usual procedures. This also applies to the German Constitution, of course. The current status is that Germany is member of a currency area involving 17 states but Sinn's line of argumentation is that the other 16 should entirely fold and adapt to whatever internal, national, German rules and politics may dictate at any given point in time. Running the world's second currency in this way with the cart before the horse leads to the guaranteed disaster that we are witnessing and that Sinn appears oblivious to.

If Sinn truly believes that Germany never will accept amending the rules as necessary in order to avoid disaster, he should say that the whole project has been a terrible idea and that the euro should be dissolved.

Sinn, also faithful to German tradition, only focuses on the lack of competitiveness in Southern Europe as the only reason for the current disaster. If only the non-Germans were more like Germans. Sinn's long text however lacks any indication as to how the current crisis should be resolved. Is he suggesting that Southern Europe should continue down the path of internal devaluations to the point that the economic and social fabric in those countries have been completely disfigured? This seems in my view to be profoundly dishonest since such a recommendation implicitly consists of gradually pushing Southern Europe to the point where they catastrophically leave the euro zone, probably under chaotic circumstances. The EU should be about avoiding "divide and rule" although Germany is doing just that, using the existence of "rules" as a very weak intellectual alibi.

Sinn's, and so many other Germans', mechanical obsession with "the rules", and the corresponding absence of open-mindedness, vision and leadership is truly depressing. What will it take before they understand that they are perceived by everybody else as the bureaucratic guardians of the Greater D-Mark?

Soon a euro zone break-up will feel more like a promise than a threat.

Seriously, though. . . . It seems the two sides are talking past each other. George makes some good points, but even he has to admit the Euro Bonds would be only a stop-gap measure, until the peripheral states could get their acts together and restructure their labor markets so as to become "competitive." And how much confidence can one really have in the Italians? Perhaps a German Eurexit is the only sane course, after all.